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New Research Shows Boards of Directors Too Passive in Developing CEO Successors

STANFORD, Calif. --(Business Wire)--

Internal candidates are the most likely to succeed a CEO, but new
research reveals a critical stumbling block in the succession process:
how well boards of directors know senior executives one level below the
CEO and a lack of board involvement in talent development. These
findings emerged from a study conducted by The
Conference Board, Stanford
University Rock Center for Corporate Governance, and The
Institute of Executive Development (IED).

In a report titled "How
Well Do Corporate Directors Know Senior Management?" the authors
detail the results of a survey of more than 150 corporate directors of
public companies in North America. The study results appear in the
latest edition of Director Notes published by The Conference
Board. Additional analysis of survey data and statistics regarding CEO
turnover events at S&P 500 companies will be included in the 2014
edition of The Conference Board's CEO Succession Practices,
slated for release in early April.

"While we found that many directors interact with senior executives
periodically in a boardroom setting, they do not have extensive exposure
to them outside of the boardroom nor do they have detailed knowledge
about their skills, capabilities, or performance," observes study
coauthor and Stanford
Graduate School of Businessfaculty member David
Larcker. "This can be a serious liability when the time comes to
identify a successor to the CEO, and can unnecessarily extend the CEO
search process."

According to coauthor and founder/CEO of IED Scott Saslow, the survey
results also suggest that board members have only passive involvement in
the development of senior leaders. "Boards would be well served to
formalize the process of explicitly identifying the required
capabilities for the CEO and the executive team, and then methodically
evaluate the candidates against this set of criteria," he says. "Often
this is not the case, and boards rely on informal evaluations and
instinct to make decisions about who is preferred as successor, and why."

Previous research also indicates that boards do not have extensive
knowledge about talent and succession-related issues at their companies.
For example, a 2010
survey found that only 54% of companies reported grooming a specific
successor for the CEO position, and 39% claimed to have no viable
internal candidates to succeed the CEO on a permanent basis if required
to do so immediately.

Building on these earlier findings, the current study uncovered the
following issues:

Directors do not claim to have particularly strong insight into the
professional capabilities and shortcomings of senior executives.
Just over half (55.1%) of directors report understanding the strengths
and weaknesses of senior executives "extremely well" or "very well."
By contrast, a third (33.5%) understand these strengths and weaknesses
only "moderately well," and the remainder (11.4%) understand them
"slightly well" or "not at all well."

Outside directors do not play a formal role in the performance
evaluation of senior management. Less than a quarter (22.6%) claim
to do so, while a significant majority (77.4%) do not. Only a small
percentage of companies (7%) assign a board member to serve as a
"mentor" for senior executives.

Directors have exposure to senior executives primarily through a
formal board setting. The vast majority of directors (88.7%)
report attending three or more presentations per year by senior
management in full board meetings. A significant majority (81.6%)
attend three or more presentations per year by senior management in
committee meetings.

Non-employee directors claim to have direct access to senior
management, but they do not report taking advantage of this access
very frequently. Just over a quarter (28%) meet with senior
executives outside the presence of the CEO on a quarterly basis.
Almost two-thirds (65%) do so "when circumstances warrant," and 6.3%
never take advantage of this opportunity.

The study authors provide recommendations for improvement that include:

Requiring a formal talent development program with real board
involvement. The development of promising employees should not end
with their promotion to a senior management level. As leader of the
organization, the CEO has the responsibility to create and implement a
development program for direct reports, and the board should ensure
that this work is carried out.

Connecting talent development with succession. The talent
development program should be formally connected to the CEO succession
process, and the progress of individual executives should be reviewed
in the context of their potential to assume the CEO position. In order
to do this, the board needs to continually discuss and update the
required skills and experiences inventory that characterize what they
consider to be required for a new CEO.

Playing an active role. While the CEO is ultimately responsible
for the development of his or her direct reports, directors should
move beyond interacting with executives "when circumstances warrant."
They can volunteer to serve as informal mentors or advisors and, with
the approval of the CEO, meet periodically with executives in the
context of their everyday work environment.

Measuring and rewarding progress. Companies' succession plans
and talent development programs should be benchmarked against those of
industry peers. Further, the CEO should be held accountable for the
development of his or her direct reports, with talent development
included as a key performance indicator (KPI) for his or her executive
compensation program.

For more detailed results and in-depth recommendations, the study is
publicly available at: http://www.gsb.stanford.edu/cldr/research/surveys/directors-managers.html.